Judge's decision will trigger wine-distribution changes

By KRISTEN MILLARES BOLT, SEATTLE POST-INTELLIGENCER REPORTER

Published 10:00 pm, Thursday, December 22, 2005

It seems a cut-and-dried decision: Either the Legislature can allow both in-state and out-of-state beer and wine producers to ship directly to Washington retailers, or forbid any suppliers from doing so.

That was the choice presented by U.S. District Judge Marsha Pechman's ruling on Wednesday.

The end result, however, may not be so clearcut.

Pechman's ruling sided with Costco Wholesale Corp. in its case against the Washington State Liquor Control Board. Costco argued that Washington violates the U.S. Constitution's Commerce Clause by unfairly discriminating against out-of-state producers. They cannot ship directly to in-state retailers, though in-state producers can.

The Issaquah-based wholesale club wants to negotiate directly with out-of-state suppliers, rather than buying from a distributor charging the state-mandated 10 percent mark-up.

Pechman gave the Legislature, which convenes Jan. 9, until April 14 to make its choice. But if lawmakers are unable to reach a consensus by then, she will impose her own judicial remedy: "to withdraw the self-distribution from in-state producers, rather than extending the privilege to out-of-state producers."

That sent shock waves through Washington's small wineries. The vast majority of Washington's 385 wineries produce fewer than 2,000 cases per year -- too little, they say, to be able to afford the distributor's cut or even get a distribution deal.

They argued that allowing out-of-state suppliers to ship directly to in-state retailers would create an undue burden on the regulatory system. But on Thursday, both parties hinted that their legislative strategy would not be as harsh as their litigation strategy.

"Request legislation will go forward, but that won't be done without the full participation of all the stakeholders involved in the case," said Bob Burdick, a Liquor Control Board spokesman. "It is very much a collaborative issue, for both parties to the suit and other members of the regulated community."

However, he said there is no public forum set up for beer and wine producers, distributors and retailers to air their views, so it is up to them to contact the state liquor board or their appropriate association to give their input.

On Wednesday, executive director Phil Wayt of the Washington Beer & Wine Wholesalers Association said the group supports the judge's position.

But a day later, the association said that remedy might be appropriate for the judge's constraints, but "her authority does not include crafting the kind of compromise that reflects the interests of the state, the wineries and the public that the Legislature can and undoubtedly will create."

Washington's wine industry has grown dramatically in the past 20 years. Second in the nation to California, its economic impact in the state is estimated at $3 billion by the Washington Wine Commission.

Keeping small wineries from self-distributing could send them out of business and cripple the industry's growth, said Tim Hightower, the president of the Washington Wine Institute, a lobbying group for the state's wineries.

"If no one else runs a bill, we will run a bill with the basic provision being to open up sales to out-of-state wineries, so that we can preserve the right of Washington state wineries to sell directly to retailers," Hightower said, adding that his group would meet with the control board and the wholesalers before doing so.

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John Sullivan, Costco's associate general counsel, said the company would advocate opening up all direct shipment, though the busy retail holiday season has kept any discussions from occurring yet.

"Certainly, we have an interest in what we set out to do: to level the playing field on direct shipment to retailers," said John Sullivan, Costco's associate general counsel. "We have every intention in seeing the judge's decisions end up at that point."